Overview of the consumer credit boom in 2016

05-Jan-2017 Intellasia | Dau Tu Chung Khoan | 6:00 AM Print This Post

Although finance companies disclosed very limited information about the growth of their outstanding loans as well as profit results, the fact showed that consumer lending activity increased very strongly in 2016, not only at finance companies but also at commercial banks. .

Home Credit Vietnam Finance Company (Home Credit) recorded 1.9 million new customers in 2016, up by 90 percent compared to 2015. Until the end of 2016, the total number of customers of Home Credit reached 4.9 million people. Leader of Home Credit said that the company achieved a lending revenue growth of 94 percent in 2016. In particular, the cash loans rose significantly with revenue growth of 80 percent in 2016 compared to 2015, accounting for 27 percent of the total revenue from lending in 2016 of Home Credit. Over 20 percent of the company’s customers have from two cash borrowing agreements.

Starting the operation in Vietnam in 2009, the development of cash loans of Home Credit was in double digits throughout the 2010-2015 period with average growth of 57 percent. This finance company has two lines of cash loans, one of which is cash lending to new customers (who never borrow at Home Credit) with a maximum credit limit of 20 million dong) and the other is cash lending to old customers (who have borrowed instalment loans for purchasing products such as motorbikes, electronics, and electrical appliances, etc.) with a maximum credit limit of 60 million dong. The average cash lending interest rate at Home Credit is 40 percent per annum.

Bruce Allan Butler, general director of Home Credit Vietnam said that borrowers at finance companies are often workers with average income and inability to satisfy the conditions for borrowing consumer loans at banks. The sharp rise of cash revenue lending of Home Credit shows that the demand for cash loans for consumption purposes of this segment of customers is real and significant.

For FE Credit – the consumer finance division of Vietnam Prosperity Commercial Joint Stock Bank (VPBank), the company does not only offer direct cash loans but also promote cash lending via credit cards. FE Credit is currently launching the programme called “fast cash” which allows customers to disburse the cash within the limit of their credit cards through paying agents at over 2,000 post office branches nationwide. Specifically, individual eligible to participate in the programme will receive a call from a financial advisor to confirm the participation, receive message providing information about the disbursement, and can later come to any post office to receive the money.

Nimish Vinaylant Dwivedi, Business director of Credit cards and Payment Centre of FE Credit said that the above product is offered to customers having good credit history, with an aim to quickly and conveniently provide cash with flexible instalment payment for cardholders. The card limit can reach up to 60 million dong.

Cash lending is also one of the core business of HD Saison. The company has connected with some schools to offer lending products which allow students to borrow cash for paying tuitions and support teachers on consumer loans. Customers of HD Saison can borrow instalment loans to purchase goods valued from several hundreds of thousands dong to tens of million dong.

In addition to cash loans, in 2016, finance companies boosted the sales of instalment loans with interest rate of zero percent per annum. This is considered one of the strategy to expand market share. In the first six months of 2016, 50 percent of customers of Home Credit borrowed instalment loans at interest rate of zero percent. Each month, Home Credit launched at least 30 credit packages with interest rate of zero percent. Other finance companies such as FE Credit and HD Saison also offered this type of product.

The consumer lending market in 2016 also witnessed the strong development of banks in retail banking. deputy general director of State Bank of Vietnam (SBV) Hochiminh city branch Nguyen Hoang Minh said that in 2012-2015 period, the outstanding consumer credit grew at an average of 20 percent per annum, while the economic growth in this period was about eight to nine percent. In 2014-2015 period alone, the consumer lending accounted for six to eight percent of the total outstanding loans of Hochiminh city.

In 2016, the consumer credit continued to break out. By the end of October 2016, the outstanding consumer loans of Hochiminh city were 201 trillion dong, accounting for 14.7 percent of the total outstanding loans of the city. This means that the market share of consumer credit segment was two times higher than the previous two years.

According to SBV, the current outstanding consumer credit only accounts for about eight percent of the total outstanding credit of the country. Meanwhile, data of the general Statistical Office showed that only about 20 percent of Vietnamese people (nearly 20 million persons) have bank accounts. Thus, the room for developing consumer finance in Vietnam is very huge as the demand for consumer loans of people is increasing.

However, credit growth always goes along with the bad debt risks although finance companies have strictly controlled the lending activities. Ivo Slanina, Sales director of Home Credit shared that the high consumer lending rates have somewhat limited the risks of the loans. In addition to the traditional assessment tools which based on credit history of customers, Home Credit has also used statistical models to establish potential behavioural profile of customers. So far, although 95 percent of the borrowing applications of Home Credit are approved in 15 minutes, the company’s bad debt ratio of the company is still controlled below four percent.

According to economic experts, the actual bad debt ratio of finance companies in Vietnam is ranging around three to four percent and this is a fairly high level. Dr Nguyen Tri Hieu, a banking and finance expert, said that the development of consumer credit must pay attention to risk control because the risks in consumer lending of finance companies are higher than that of other credit institutions, as customers are individuals and small organisations who do not meet the lending conditions of banks.

After six years in operation, FE Credit is currently providing personal consumer lending services with products such as cash loans, motorcycle loans, and loans to buy household electronic equipment, with value of up to 70 million dong on terms from six to 36 months. Until now, FE Credit has served nearly three million customers and cooperated with more than 4,000 partners across the country. However, the bad debt burden of FE Credit is affecting the profit result of VPBank.

As of September 30th 2016, the lending to customers of VPBank reached nearly 130 trillion dong, up by 12 percent compared to 2015. In this number, lending through FE Credit accounted for 22 percent.

Meanwhile, the amount of bad debts of VPBank alone in this period was 2.383 trillion dong, accounting for 2.35 percent of the total outstanding loans. Notably, the bad debt ratio of VPBank’s subsidiary – FE Credit reached up to 5.69 percent with 1.629 trillion dong.

According to the deputy director of SBV’s Hochiminh city branch, the bad debts from consumer lending currently accounts for more than 2.5 percent of the total outstanding consumer loans. Thus, it is necessary to have legal provisions for consumer lending activities which are mainly provided by finance companies. Under the second draft circular regulating the consumer lending of finance companies, these units must announce the lowest and highest interest rate levels. This will be the basis for SBV to recognise and evaluate finance companies in order to see which interest rate level is suitable for a specific risk level.

At the same time, this draft circular also requires finance companies to list interest rates annually instead of monthly listing them as before. This will reduce the annoyance of people about lending interest rates, and help customers easily compare to the lending interest rates offered by banks, avoiding the situation when finance companies apply overly high interest rates.

Leader of SBV’s Hochiminh city branch added that SBV was in quandary situation when many people reported that finance companies violated the law but there were actually no violations if based on the current legal regulations. The new content of the draft circular will help SBV to have legal basis to manage and inspect finance companies in implementing their strategies to attract borrowers.


Category: FinanceAsia

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